Stuck with frustrating debt? Need help in settling debt? Debt settlement is an approach to manage your debt by negotiating with your creditors and reducing the total amount. It helps people avoid bankruptcy while paying their debt at a lower cost. Understanding how does debt settlement work and its alternatives will help you choose the best financial path. We have covered about it in detail below. This will help you consult a professional debt settlement attorney for correct guidance.
What is Debt Settlement?
You negotiate with your creditors to accept a lump-sum payment. The payment will be less than the total debt that they own from them. Once they agree to settle, you are free from the remaining balance.
Types of Debt Eligible for Settlement
The method works for unsecured debts. The most commonly settled debts include:
Credit card debt
Medical bills
Personal loans
Private student loans
Business debt
The Debt Settlement Process
Steps Involved in Debt Settlement
Step 1: You have to analyze your debt situation and identify the ones that are valid for settlement.
Step 2: Contact your creditors to negotiate a deal. You can offer a lump-sum payment. They may agree to a lower amount to recover part of the debt.
Step 3: Now, make sure that the creditors offer documentation that confirms the settlement terms. You have to get everything in writing.
Step 4: Make the payment. After you make the payment, the creditor should report the debt as paid or settled on your credit report.
Working with a Debt Settlement Company
The company experts will carry out the negotiation process on your behalf. So, they will charge for the services. They can advise you to stop payments which can harm your credit score. So, pick a professional company and analyze all the costs involved in the process.
Legal Aspects of Debt Settlement
Debt Settlement Attorney’s Role
An attorney can help you with several things in the settlement process such as:
Negotiate settlement
Protect you from lawsuits of the creditors
Make sure that your rights are upheld
Review agreements to prevent any unfair terms
Potential Legal Implications
There can be some issues with the process. The secured debt is often reported as “settled for less than owed,” which may affect credit scores. Also, your creditors may sue you in case negotiations fail.
IRS Tax Debt Settlement
IRS Debt Settlement Programs
The IRS tax debt settlement program USA includes options such as:
Offer in Compromise (OIC)
Installment Agreements
Currently Not Collectible (CNC) Status
Eligibility for Tax Debt Settlements.
There are some requirements to qualify for IRS tax settlement such as:
Showcase financial hardship
Complete required forms
Make sure all tax returns are filed
The IRS will go through your income, expenses, assets, etc. to check your eligibility.
Pros and Cons of Debt Settlements
Benefits of Debt Settlements
There are several perks of the process:
It reduces the total debt owed.
You can pick the process to avoid bankruptcy which can affect your credit score adversely.
It offers faster debt resolution.
Risks and Drawbacks
There are some risks associated with the process:
It can do some damage to your credit score.
The forgiven debt may be taxable.
If the settlement fails, creditors may sue for unpaid amounts.
Alternatives to Debt Settlements
Bankruptcy Options
People who cannot go for settlement can opt for the following options:
Chapter 7 Bankruptcy: You can get a clean slate with it. However, you have to sell your assets.
Chapter 13 Bankruptcy: You can get into a repayment plan for 3 to 5 years. Also, you can protect your assets.
Debt Consolidation vs. Debt Settlements
Debt consolidation puts multiple debts into a single loan with lower interest. This further simplifies the payment process. The process is different from settlement. It does not reduce the principal owed but prevents late fees and collection actions.
